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DVD kiosks battle online services, bargain sellers

DVD rental kiosks are appearing in more and more prominent retail locations. But experts wonder whether Redbox and its competitors can survive in the world of NetFlix, Blockbuster and free on-demand cable content.

May 7, 2006 by James Bickers — Editor, Networld Alliance

The author is also editor of Self-Service World.

There is no denying the synergy of "dinner and a movie." Like pizza and beer, Abbott and Costello or baseball and spring, some things just go well together.

This basic fact has helped drive the success of McDonald's subsidiary Redbox, which operates kiosks that let diners rent a new release DVD for about a dollar a night. Already getting dinner for the family? Grab a movie in just a few seconds. Making the trip specifically for a movie? Just try to resist the smell of French fries coming from a few feet away.

Greg Waring, vice president of marketing for Redbox, said the company rented its 11 millionth DVD in April, and just last week installed its 1,000th machine.

"We're growing for two major reasons," Waring said. "Our footprint is growing, and we're adding locations at a major rate. But on a same-machine basis, we're experiencing very significant growth for machines that have been open for a year. Nice year-over-year sales growth on same-machine sales."

But the movie rental industry's biggest player isn't scared.

"Vending machines don't generate significant rental volume or revenue - they just don't have the capacity to do that," said Randy Hargrove, spokesman for Blockbuster Inc. "It can offer convenience, but the selection isn't very broad."

Inside the big red box

Redbox executives are the first to admit that their machine doesn't compete with a traditional video store or an online house like NetFlix when it comes to breadth of selection. From the beginning, the machine's niche has been new releases every Tuesday, the day studios ship new titles.

"We typically are carrying somewhere around 60 titles in the machine at any one time, which averages about four months' worth of new releases," Waring said. "Some titles, like kids' titles, we might keep in the machine a bit longer. But our core business is new releases."

Movies rented from a Redbox machine are delivered in special, slim-line cases. Of the 500 to 1,000 slots inside a Redbox machine, Waring said 80 can hold Amaray cases, the full-sized boxes consumers see on store shelves - allowing the company to sell movies in addition to renting them. So far, the company has experimented with sell-through of regional niche titles (a Busch Stadium documentary DVD in St. Louis locations) and a few high-profile titles like "Lady and the Tramp" and "The Chronicles of Narnia - The Lion, the Witch and the Wardrobe."

But the viability of sell-through remains to be seen. "We need to figure out exactly what the right business model is for sell-through," Waring said. "We're not sure if it's new releases or older titles or specialty titles. We're still in testing mode on that."

TNR's rental kiosk, which is located in Kroger grocery stores

Redbox has made waves with recently inked deals to move into large grocery chains like Stop & Shop and Giant Food, but it's not the only kid on the block. Houston-based The New Release (TNR) has deals in place with chains throughout the south, including Kroger, Food Lion and Safeway. According to a news release, TNR has a portfolio of 215 locations, with 336 more under contract. The company serves more than 100,000 customers monthly.

DVDPlay, manufacturer of the "Automated Entertainment Machine" or AEM, has added another wrinkle: selling advertising on the machines. Located in Los Gatos, Calif., the company boasts 500 machines deployed in 33 states and Canada, chiefly in supermarket chains. AEMs come equipped with an LCD display atop the enclosure; the company runs its own advertising network, selling 10-, 30- and 60-second commercials on the display as well as on the attract loop of the touchscreen.

Like the other kiosks, DVDPlay's AEM uses a fully automated inventory mechanism so that the moment a movie is returned, it is available for rental by the next customer.

If you build it Â… will they rent?

Geoffrey Kleinman, founder and publisher of DVDTalk.com and DVD Talk radio, said that services like Redbox are going to face challenges over the long run, chiefly because the purchase price of DVDs has dropped so dramatically - in some cases, just a few dollars more than a rental.

DVDPlay's Automated Entertainment Machine, or AEM

"It's not necessarily a discerning audience," he said. "Low-price kiosks go to the low-price-seeker. It may not be the same consumer that NetFlix or Blockbuster is going after, but it may be the same consumer that the low-price retailer is trying to convince to spend a few more bucks to buy the movie."

Blockbuster, for its part, experimented with DVD rental kiosks, but only in international markets. Hargrove said there were 21 Blockbuster rental kiosks at the end of 2005, chiefly in Israel and Spain, but they would be removed when the company pulls out of those markets in the coming months.

"We will continue to monitor vending machines, just like we do any competitor in the home entertainment space," Hargrove added. "But we think it makes more sense to invest our money where the majority of customers want to rent - and that is in our stores and increasingly online."

About James Bickers

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